Is it Better for you to Take the Pension or the Lump Sum?
One of the hardest decisions you may have to make as you get ready to retire is whether or not you will take your pension as a monthly (some pay quarterly) payment, or the actuarial value of those expected payments in one lump sum. So…do you take the $1000 a month for each month for the rest of your life, or do you take the $1,000,000 they tell you that is worth and no monthly payments from your company for the rest of your life?
Who Should Advise You
This is one decision you need the help of an expert to figure out. That expert is not someone from HR, and it is not your old buddy who retired last year. He or she should be your tax accountant, a wealth advisor, or some other professional who specializes in answering these kinds of questions.
Warning…if the person advising you tells you to take the lump sum and then tells you exactly how to invest that money…in an annuity or life product or stocks and mutual funds that they are happy to sell you…think twice before you buy.
Deciding Factors: Pension or Lump Sum
I am not qualified to advise you. However, I am qualified to give you some things to think about as you make this decision:
- Make sure you understand the tax consequences of each option.
- I hate annuities and do not like life products at the retirement stage of life. Just be careful before you invest in either of these options with your lump sum.
- If you take the lump sum, who is going to manage your money? If it is a wealth advisor, there will be an annual cost for the service. Make sure you understand it. Also make sure you understand what access they will have to your funds and how they can buy and sell equities, bonds or other financials vehicles for you.
I manage my own funds because I was in the financial services business all of my life and I have a good understanding of the products and services available. And, when I reach 80 years of age, I plan to put my money into the simplest possible investment vehicles and leave them alone. I watched my dad get old and watched his ability to manage his own assets diminish — I am taking that as a warning to myself. At some point I will put my finances on autopilot or turn them over to a trusted advisor to handle for me.
- If you are going to manage your lump sum payout and you have not managed large sums of money prior to now…think twice. It does not matter how smart you are, the stock market and financial world is no place for beginners with large sums to invest. So, unless you have someone you really trust…and I mean REALLY trust…you might want to go with the pension.
- If you decide on the monthly pension payment, make sure you understand your options to protect some of that payment for your spouse. You might find that the sum you were counting on is going to be quite a bit smaller, as you protect the interests of your surviving spouse.
- One of the reasons I took lump sums from the companies that owed me pensions was that I saw what happened to many of my friends when they retired and then the company turned their pensions over to a government agency (look up the PBGC). (Ask any of your airline pilot friends how that worked out for them.) It is a disaster. I want control of my money.
So just now when I Googled PBGC to make sure I had the letters right…up came a bunch of articles about how the government could come in and take over 401K accounts. Scary. If you start seeing a whole lot of discussion about that possibility (I doubt that will happen with the new administration)…get some advice on how to handle it.
- And just a thought about tax sheltered retirement vehicles such as 401K accounts…milk them for all they are worth. If you want to max out your return from such accounts, leave ALL the money in them until you are forced to start to take money out (which I think currently happens starting at age 70.5, when you have to take out 5% of their value per year and pay ordinary income tax on the withdrawal…this is how the government finally gets to tax the tax sheltered money). I am not an expert in this area…get expert advise from your tax person on how to best handle these withdrawals.
Always Consult a Professional!
I doubt that I have done much more than give you a bunch of things to think about in the whole area of pension vs lump sum. That was my intention. It is confusing and something that you need to figure out for your own situation.
If you like certainty (with the exception of the possibility that your company might end up turning over your pension plan to the PBGC which will likely give your monthly payment a large haircut), go with the pension.
If you think you can SAFELY manage a lump sum…handle it in a way that does not trigger a horrible tax event…handle it in a way that does not take on excess risk but does provide an adequate return…then take the lump sum.
Either way, get professional help before making this important decision.
Hey Don, Bob Z here. Hope you are well.
In the last section of the article, “Always Consult a Professional”, you state “If you like certainty…go with the lump sum”, don’t you mean stick with the pension?
Great to hear from you Bob Z. You are absolutely right and I corrected it in the blog. Thanks for the catch. I trust life is treating you well and that your golf game is still excellent. We are doing our best to hang on here in Hawaii…actually having the best time of our lives. All the best to you and yours. Aloha.